How to enter and thrive in e-commerce in China

On its way to becoming the world's biggest economy, China is poised to become the largest online marketplace in the world. Last year Chinese e-commerce generated $194.6 billion in sales, up 54.6% from 2011, according to financial services firm Macquarie Group Ltd., and it is on track to surpass the United States as the biggest single online market for sales next year.

This fast-growing market represents a significant opportunity for U.S. and European retailers. China already boasts the highest number of consumers who buy goods online in the world—nearly 220 million in 2012, according to research firm eMarketer Inc.—thanks to increasing Internet penetration and an expanding middle class. The number of Chinese online shoppers is set to double by 2016, with the average amount spent online per user predicted to rise from $670 today to $1,039 in the same timeframe.

Given the growth projections for China's online retail market, it's no surprise that foreign brands are looking to seize the opportunities China represents. China is an extraordinarily challenging market to enter, however, and must be navigated with prudence.

Consumer preferences

While Chinese consumers are enthusiastically embracing e-commerce, trust remains a primary issue. The early days of Chinese online shopping were plagued by credit card fraud and counterfeit goods, but the introduction of PayPal-like payment services have gone a long way to address these issues.

Chinese consumers distrust advertising and news sources and, as a consequence, recommendations from online reviewers and peers on social networks are more important than in the West. When determining site design, on-site rating and review modules are unnecessary. The key social media outlets are Youku (similar to YouTube), Kaixin (a Facebook-like site), Tudou (another video site), Tencent Weibo and Sina Weibo (microblogging platforms similar to Twitter) and the MySpace-like Qzone. Chinese online shoppers look for reviews and recommendations on these social platforms rather than on e-commerce sites where they are viewed as retailer advertising.

However, smooth integrations with local social sites are essential. More than 40% of online shoppers in China consume and post product reviews online, according to The Boston Consulting Group.

Shopping trends

Chinese online shoppers love a bargain, as evidenced by the popularity of Taobao, a leading commerce site with both auctions and fixed-price offers. Taobao, which is owned by Alibaba Group Holdings Ltd., the largest e-commerce company in Asia, also provides customers with an easy option to compare products and prices without going from one page to the next. For retailers considering a move into the Chinese market, integrating into a marketplace such as Taobao is as easy as integrating into Amazon is in the Western world. Alibaba also operates TMall, designed to attract larger retailers and brands. Down the line, retailers may also profit from Alibaba's recently announced $16 billion investment in logistics infrastructure that aims to improve delivery capabilities in China, where there is currently no equivalent to Western delivery companies like FedEx and UPS Inc.

However, retailers should be aware that on Taobao and other sites they largely compete on price because the marketplaces limit the ways retailers can promote and highlight their products. That means retailers should decide how they want to build their brand outside of Taobao and how to migrate customers to their own sites to improve margins and create customer loyalty.

Customizing content

Whether on a marketplace or their own sites, online retailers must consider what and how content will be presented to consumers. First, retailers should translate their content for local audiences, both in language and context. After all, content that resonates culturally in Los Angeles might not make sense in Shanghai.

Although improving, broadband and network speeds still lag behind what is common in the West. That means Chinese consumers may have trouble navigating rich-media sites on desktop computers or mobile devices. Western retailers should consider integrating with a local content delivery network such as China Cache or gain a thorough understanding of local caching rules. The Chinese government has not let many Western content delivery networks establish operations in mainland China.

And while Internet Explorer 6 (IE6) is in the browser boneyard in the United States, it remains the browser of choice for nearly a third of China's Internet users. Optimizing sites for IE6 and scripting languages is important, as is avoiding any integration with Google Inc.'s technologies. Previously, the Chinese government denied access to Google search, and services like Google Analytics remain unavailable in China.

Commerce sites should be optimized for all types of devices—smartphones in particular. By the end of 2012, China had 422 million mobile phone Internet users, 64.4 million more than a year earlier. Among all Internet users, those using mobile phones to access the Internet increased from 69.3% at the end of 2011 to 74.5% at the end of 2012, exceeding the levels using desktop (70.6%) or laptop (45.9%) computers, according to the China Internet Network Information Center, the government-authorized body that maintains the country's Internet infrastructure.

Government regulations and compliance

Western retailers planning to do business in China should retain in-country legal counsel to navigate the various levels of Chinese government bureaucracy. This is especially true when securing an Internet Content Provider License, which is mandatory when selling anything online in China.

Online sales policies, sales terms and conditions, and policies governing returns and exchanges should all be cleared with a local expert who can advise the best way to address all relevant legal mandates and cultural norms.

Retailers will want to work with local native-speaking implementation partners familiar with the cultural, technical, legal, political and governmental challenges to selling online in China. Their input during the planning and design phases can help avoid project delays and cost overages.

Technology considerations

From the very beginning of building an e-commerce site, a retailer should keep in mind local technical standards and Chinese consumers' expectations. For example, payment solutions and fulfillment operations are different than in the West. Alipay, an electronic payment system similar to eBay Inc.'s PayPal, is ubiquitous in China, and many Chinese consumers prefer to pay in cash when goods are delivered.